Candidates are expected to discuss any three (3) of the following anti-avoidance provisions in the Income Tax Act, 2015 (Act 896):

a. Arm’s Length Transactions
Section 31 of Act 896 provides that the income and tax implications of arrangements between persons in a controlled relationship must reflect the arm’s length standard. The arm’s length standard requires persons who are in a controlled relationship to quantify, characterize, apportion and allocate amounts to be included in or deducted from income to reflect that which would have been made between independent persons.
Therefore, if a person provides a loan to a related person, the terms of the loan which includes the interest payable on the loan must reflect the interest an independent person in a similar circumstance would have paid on the loan.
If the interest rate does not reflect that which would have been charged between independent persons, the Commissioner-General is empowered to adjust the interest to reflect the arm’s length standard.
Furthermore, the Commissioner-General is given power under section 31 of Act 896 to, where appropriate, re-characterize debt financing as equity financing if the terms of the financing arrangement do not accord with the arm’s length provisions.

b. Thin Capitalization
Another provision available to the Commissioner-General to prevent tax avoidance via related party loans is thin capitalization.
Section 33 of Act 896 provides that where a resident entity which is not a financial institution and in which 50% or more of the underlying ownership is held by an exempt person either alone or together with associates has a debt to equity ratio in excess of 3:1 at any time during a basis period, a deduction is disallowed for any interest paid by that entity on the part of the debt which exceeds the 3:1 ratio.
Exempt person is defined in section 33 of Act 896 as either a non-resident person or a resident person for whom interest paid by a resident entity constitutes exempt income.
Regulation 20 of the Income Tax Regulations, 2016 (L.I. 2244) defines “debt” to mean an obligation to pay an amount owed to an exempt person and “equity” to mean the sum of Stated Capital and Income Surplus.
Thus, if an exempt person who owns at least 50% of the underlying ownership in an entity provides a loan to that entity, the allowable deduction for interest will be restricted to that part of the loan which does not exceed three times the equity of that person in the entity.

c. Income Splitting
Income splitting involves any scheme where a person artificially assigns income to another person in order to reduce the tax liability of the assignor. For individuals, the income tax rates in the First Schedule to Act 896 is a graduated rate which simply means high income earners pay more tax than low-income earners. Thus, where a person earns income which places the person in a high tax bracket, there is an incentive to split the income and assign a portion of the income to a person in a low tax bracket in order to reduce the tax payable on the entire amount.
To defeat this tax avoidance strategy, section 32 of Act 896 provides that where a person attempts to split income with another person in order to reduce the tax payable by that person, the Commissioner-General may, by notice in writing to the person, prevent a reduction in tax payable.